The Second Circuit recently held in Katz v. Cellco P’Ship d/b/a/ Verizon Wireless, Nos. 14-138, 14-291, 2015 WL 4528658 (2d Cir. July 28, 2015) that, under the Federal Arbitration Act (“FAA”), district courts must stay all proceedings upon a finding that the claims before the court are subject to arbitration if a stay is requested.
Plaintiff filed various state law claims in the Federal District Court. Upon considering cross-motions of the parties, the District Court held that plaintiffs’ constitutional challenges to the FAA were without merit and that the claims were subject to the parties’ agreement to arbitrate disputes. The Court then dismissed the case despite the fact that the defendant requested a stay, and plaintiff appealed the dismissal.
The Second Circuit summarily affirmed the District Court’s finding that the FAA was constitutional and that plaintiff’s claims were subject to arbitration. The only remaining issue to be decided on appeal was whether the plaintiff’s claims should have been stayed or dismissed. The appeals court held that dismissal was not proper under the plain language of Section 3 of the FAA, which states that a court “shall” stay all claims if it refers the claims to arbitration and one of the parties requests a stay. The Court reasoned that allowing discretion to dismiss the case permits immediate appeal of an order compelling arbitration, which would create barriers to arbitration that do not comport with the policy or language of the FAA – i.e., to facilitate and promote arbitration. The court noted that even though dismissal may facilitate a court’s management of its docket, the need for efficient docket control does not trump the statutory mandate of the FAA. For this reason, the Second Circuit vacated and remanded the dismissal.
Katz is significant not only because it defines the state of the law in the Second Circuit on this issue, but also because it further highlights a circuit split, with the Seventh, Tenth, Eleventh, and now Second Circuits holding that a stay is mandated under the FAA and the First, Fifth, and Ninth Circuits finding that district courts have discretion to dismiss the action. Therefore, final clarity on this issue may need to come from the Supreme Court if and when it decides to resolve the split among the circuits.